A guiding ‘toolbox’ for entrepreneurial action in times of economic turbulence
While the Covid-19 crisis affects all types of economic activity, public support programmes tend to prioritise and protect established organisations. The priority for public institutions seems to be to reduce bankruptcy risk and job destruction. Unfortunately, promoting innovation or entrepreneurial activity may fall by the wayside in times of crisis.
Entrepreneurial action under uncertainty
When studying entrepreneurial action under uncertainty, one key question is whether entrepreneurs may benefit from planning to produce an organised response, and whether having a plan is enough to navigate through a crisis.
Entrepreneurship research has engaged in deep discussions on the value of planning in contexts of high uncertainty. Research shows that planning processes could have a positive effect on survival and on venture performance – as long as it is not overdone.
But it is less clear if this effect holds across new ventures in different development stages, or under different levels of uncertainty.
Multiple questions remain unanswered about how entrepreneurs can respond to the ongoing Covid-19 crisis.
To provide insight into how entrepreneurs can take action in times of crisis, our rapid-response contribution in the Journal of Business Venturing Insights examines three major perspectives:
- Business planning
- Social support
We integrate these three areas of research into the Covid-19 response phases (pre, during, and post-crisis) and propose a guiding framework to help entrepreneurs take action during this unexpected crisis.
The Covid-19 economic crisis poses an existential threat to many ventures
The framework can be used as a toolbox to help entrepreneurs prepare and respond to the Covid-19 pandemic. Our suggestions aim to help entrepreneurs and entrepreneurial stakeholders respond to the crisis and prepare for an uncertain future.
1. Business planning
The coronavirus pandemic was a largely unforeseen event that was not considered in venture business planning processes or resulting outcomes. By and large, the Covid-19 economic crisis poses an existential threat to many ventures.
For entrepreneurs and investors, Covid-19 means that they need to swiftly re-engage and adapt their business planning documents.
As the economic context changes rapidly, planning frequency, re-assessments, and adjustments need to increase until a more stable environment is reached. However, if business planning takes substantial time and resources (which, in the current context are needed for potentially more value-creating activities such as speeding up new product development, closing customer contracts, or directly interacting with investors) this could represent a potentially substantial and costly effort.
Hence, entrepreneurs need to carefully consider the appropriate degree of business planning needed and the type of efforts.
Recommendations to adjust business planning in a crisis
Given this dynamism, working with less formal and more concise forms of planning appears advisable.
Planning efforts can be directed to focus on upside potential (e.g., by aiming for outlier revenue growth), and/or the focus may be on limiting downside risk and assuring early profitability and positive cashflow, using an overall satisficing orientation.
In the current context, entrepreneurs may aim to opt for more cautious growth targets given the increased risks and uncertainty in the market and greater financial resource-acquisition constraints. Yet, lowering growth targets may prove disadvantageous when seeking external investors (from professional investors such as VCs) who are likely to have become more selective. Hence, they may aim at maintaining ambitious growth targets and trajectories when going the VC route while maintaining a less resource demanding but attractive growth option should the more substantial financing options not substantiate.
Although governments appear to focus on providing additional financing to compensate for shortfalls and constraints in the current financing domain, founders, supporting actors, and investors might best be served focusing on alternative financing forms as government-inspired finance may not reach them as anticipated.
Frugality is an individual disposition associated with entrepreneurs and defined as, "a general preference to preserve resources and apply an economic rationale in the acquisition of resources."
Having a frugal disposition may serve to ameliorate the impacts of Covid-19 on small and emerging new ventures.
The idea of frugality has persisted over time as a means to reduce consumption while simultaneously building wealth in periods of economic turmoil. For example, frugality was the primary mantra conveyed by the US government to help the country recover from the economic hardships experienced during and after World War II.
Having a frugal disposition may serve to ameliorate the impacts of Covid-19 on small and emerging new ventures
Still today, some of the most successful entrepreneurs have attributed their success to their frugal disposition (such as Warren Buffet and Jeff Bezos, the founders of Berkshire Hathaway and Amazon, respectively).
The main point is that frugality, while a timeless concept, may be a particularly powerful mindset in helping entrepreneurs bounce back from the economic hardships caused by the Covid-19 pandemic.
Recommendations to adjust frugality in a crisis
Frugality is a commonly understood term, but may be confused with the concept of being cheap or miserly. In fact, research suggests quite the opposite: frugality is not pure deprivation but reflects short-term sacrifices in buying and using consumer goods to achieve idiosyncratic longer-term goals.
Behaving frugally requires a long-term goal (e.g., business survival beyond the next two years), a focus on using all available resources at hand, and getting the best possible deal when acquiring new goods and services.
In very practical terms, a frugal entrepreneur behaves as follows:
- sell off or divest from all goods and services or resources (i.e., capital) that do not contribute to primary revenue streams
- take stock, organise, and prioritise (maintaining and acquiring) goods, services, or resources that contribute directly to revenues by focusing on frugal choices
- reduce short-term liabilities and renegotiate financial expenses.
However, as much as frugality will support retrenchment, its long-term effects on business turnaround are mixed. Here is where the entrepreneur’s ability to time the investment of (existing or new) slack resources into innovation opportunities will make a difference for long-term performance. The objective is to survive the crisis, be better prepared to mitigate the impact of similar events in the future, and foster resource-conscious operations.
3. Social support
Besides adjusting the planning processes and exploring frugality as an advantageous behaviour in this turbulent environment, social support can also be a conduit for much-needed personal and professional connections as the crisis continues.
Prior entrepreneurship research shows that entrepreneurs’ social networks are important for performance because they provide access to valuable resources.
One important resource exchange in social networks is social support, including information support and emotional support (such as encouragement, empathy, and closeness).
Among entrepreneurs who experienced the economic downturn of 2008, greater contact with social ties reduced the impact of economic stress, which in turn reduced any intention to withdraw from entrepreneurship altogether.
Recommendations to adjust emotional support in a crisis
During a highly stressful and uncertain situation such as Covid-19 with lockdowns and physical distancing, it remains reasonably easy to obtain informational support with modern technology. However, in such situations, emotional support – which plays an important role as a negativity buffer – is less available and more difficult to obtain than usual.
Crisis situations, including pandemics, can often create cohesion and a more collective culture where asking for help is appropriate and encouraged. But this is ambiguous in the Covid-19 context, as asking for social support may be less acceptable, and it could be believed that personal problems should be solved independently because of worries about infection from Covid-19, or not wanting to rely on others who are also struggling.
Crisis situations can often create cohesion and a more collective culture where asking for help is appropriate and encouraged
But, luckily for entrepreneurs, there are other and less conventional pathways for emotional support.
First, and most obviously, entrepreneurs can turn to other sources – specifically online media.
Health research shows that emotional support can be obtained effectively through computer-mediated communication that importantly transcends the typical constraints of geography and time, including online bulletin boards, chat rooms, listservs, personal email exchanges, or omnipresent instant messaging tools. Overall, online exchanges of emotional support among entrepreneurs are also shown to enhance productivity.
Secondly, and perhaps less obviously, collective culture becomes a source of social support in itself. Entrepreneurs may satisfy part of their need for emotional support in the broader community spirit of "being in this together online." Entrepreneurs become co-creators of an online, or appropriately socially distanced, community of emotional support (as we have seen when Italians sing from their balconies and pass on good vibes).
Online exchanges of emotional support among entrepreneurs are shown to enhance productivity
Here, collective identities are powerful – as we know from social movements – and the emotional support co-created among entrepreneurs on the basis of common and collective identity (e.g., suffering from lockdowns) should not be underestimated.
Co-created emotional support might simultaneously strengthen coherence among stakeholders within the entrepreneurial ecosystem, and thereby in the longer run help establish a more resilient ecosystem.
Overall, based on theory and research regarding how business planning activities, frugality, and emotional support can guide entrepreneurship stakeholders and entrepreneurs, we recommend:
- Adjusting to less formal, more frequent, and nuanced business planning activities
- Adopting a frugal organisational culture that protects and prioritises resources that directly contribute to the products and services and the long-term vision of the venture
- Formalising the informal so that emotional support can be exchanged internally and externally
In addition to these recommendations, there are also some other overall considerations.
First, the conversation should not be about whether to plan or not in the current context, but on what type of planning will help increase the survival chances of the new venture.
Second, while frugality contributes to building resilience against the negative unexpected impacts of the crisis, social support becomes a lever to rebuild entrepreneurial identity and bounce back after the crisis.
Because of Covid-19, entrepreneurs are likely engaging in new activities and new behaviour as entrepreneurs and private citizens. The Covid-19 situation changes ways of doing things, privately and in business. Such changed behaviour is potentially an engine of serendipity; they are likely to meet new people or the same people in new ways that bring forward new opportunities to explore and possibly exploit.
That said, entrepreneurs should keep in mind that increasing networking activities is not necessarily without cost. Reaching out to dormant ties is time consuming; time that potentially could have been used on alternative venture-related activities.
It also requires developed social skills and being psychologically comfortable with such interactions to prevent this from increasing existing stress levels and anxiety.
Overall, challenging as it might be to support entrepreneurs in the current Covid-19 crisis, there are ways to increase their chances of survival and to provide much-needed constructive emotional support that leaves room for the unexpected positive outcomes that we all look forward to at the conclusion of this turbulent period.
This article is based on research by Jan Brinckmann (Esade), Ferran Giones and Alexander Brem (University of Stuttgart), Jeffrey Pollack (North Carolina State University), Timothy Michaelis (Northern Illinois University) & Kim Klyver (University of Southern Denmark).
Original research publication: Giones F, Brem A, Pollack JM, Michaelis TL, Klyver K & Brinckmann J. Revising entrepreneurial action in response to exogenous shocks: Considering the Covid-19 pandemic, Journal of Business Venturing Insights (August 2020)
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